It is a number of factors that eventually forces the issue of devaluating a currency. Very roughly, it starts like this:
Balance of payments, its components are made of:
1. current account i.e. trade balance, (receipts for what is exported and payments for what is imported).
2.capital account, i.e. foreign capital transactions, (receipts from borrowing from other countries, direct investment by other countries; and payments in form of loans to other countries, and direct investment in other countries).
3. the official monetary transactions, reserves account; is an account that deals in reserves be these currencies as reserves, or gold as the same.
Any "deficit" in accounts 1 and 2 are covered by the amounts of reserves a country holds.
At a given point if reserves are not sufficient, and deficits are excessive, then the specific currency will be devalued. It is not that simple, as there will be factors of supply and demand for the currency, interest rate policy, and other factors, such as speculation by medium to large investors. However interest rates and the speculators, are actually reactions to the other circumstances.
The IMF is a lender to Countries and its standards could be forced on a country, or no money is lent out, therefore if in the eyes of the IMF a country is "too short on reserves", with large deficits, say in its current account, then the IMF to give the needed loan to cover such deficit may ask for specific policies, that in theory would correct the situation that put the country in question, "in the hole".
This could include domestic policy, i.e. influencing cut backs in social programs, because they are causing internal "budget deficits", that in turn could cause an increase in taxes, that could not be good for the local economy, or, they could force an increase in interest rates to attempt to curb inflation....etc.
Another complication is that in many countries, much of this data is hard to come by or authorities simply do not disclose them until it is too late....
I believe in the case of Mexico, the amount of foreign reserves was far too low, ( I do not remember the details), and so the government decided to devalue, then they had to come up with the 50 billion dollars CARE PACKAGE, (which was guaranteed with receipts for payments from the oil exports, so the US was not really that much at risk).
Other problems could be caused by sheer corruption and squandering of industrial quantities of funds by the government, forcing one of the above or similar problems, in short, deficits due to the squandered money.
In practical terms, more or less this is what happens:
In the specific case of Mexico, given the proximity to the US (which enables the ordinary citizen to literary walk across the border with suitcases full of cash, (true stories in the 70's and early 80's), when the Mexican government attempted to restrict the free flow and foreign exchange between the two countries, and prior to today's requirements by US authorities to disclose the amount of cash/cash equivalents while traveling.
One sure sign that a devaluation was coming was that increased conversion by Mexican nationals of the monopoly money used in Mexico, into US Dollars, and the increased business done across the border into the US, given that relatively speaking US products became cheaper, as the Peso lost purchasing power, as inflation became rampant, (including wages), people simply made purchases in "el otro lado", (the other side), because it was better quality and in many instances cheaper.
The same would be done by more sophisticated investors via wire transfer, from bank to bank. (Or incredible vacations in Vail, CO; La Jolla, CA; Coronado Island, CA; Isla del Padre, TX and other places. In fact it made sense to buy American Real Estate, (as the same given examples can be given), because not only at times relatively equal in price, but once the devaluation took place, the investment improved by the same % of the devaluation, and in some instances even more.
This takes place because as inflation becomes near rampant, the purchasing power of the Peso, begins to deteriorate rapidly, soon any savings in Pesos, loses its incentive as the Peso loses value, (relative to the US Dollar). The cost of living becomes increasingly high.
Soon, for most people, they simply begin trading in US Dollars, when practical (most, if not all border towns).
As the government (be this on their own, or by the IMF "forced persuasion", eventually devalues the peso, people cease to take their capital to the US, (although not everyone returns the funds to Mexico), as the new valuation begins to settle things in Mexico, and
things return to some degree of "normality", people also return to "normality."
During the 50's and 60's (a combined total of 22 years, from 1954 to 1976), the exchange rate was fixed at: Monopoly Pesos $12.50/$1.00 US
From there during the late 70's and early 80's the devaluations, ( a combination of a one time event, two or three times, and eventually they were devaluating the peso about .04 cents per day, (or so), eventually it reached $3,000 to $1.00.
At such point they "eliminated three zeros", made it MP$3.00 to $1.00USD, and started a new..... Today it stands at $9.20 to $1.00 (and moving).
Capital flight prior to the devaluations becomes rampant, once the devaluation takes place, then a good percentage of the capital is returned (obviously those that did this, protected their capital's purchasing power), then the process begins again.
Lack of efficient production methods, (and in general, lack of efficiency in everything period), combined with tremendous expenditures by the government to keep the majority somehow "happy", and the ever present corruption by most leaders, eventually lead to the rampant inflation that started the whole thing in the first place.
Usually, interest rates are very high, ranging from 15 % to 80 % depending on the "specific crisis" of the time, this leads to increased costs, which leads to more inflation.
The intended "curbing" in investment caused by the rise in interest rates, dos not seem to take effect in Mexico, as sometimes, basic needs have to be financed.... (in many instances, it is here when interest rates begin to rise, that the Mexican investor, sometimes sees the need to bring back his US "savings" back into Mexico.)
Again, the process begins all over, to the point where due to one or a combination of reasons, they see themselves in the forced situation of having to devalue. By the simple fact that interest rates in Mexico are usually higher, one would assume that demand for the Peso is somehow achieved, unfortunately, this is only short term.
The problem becomes worse, when the so called "HOT MONEY" (foreign investor's funds), arrives, the country depends on these influx of
funds, and the country gets hooked.... however, when the devaluation looms, or takes place... (particularly the way they did it in 1994... unexpected), foreign investors depart. (sore arse and all), as quickly (or quicker) than they came. In that instance the Mexican government did not disclose the level of foreign reserves, by the time they disclosed it (extremely low, I do not remember)... it was rag time !! i.e.: devaluation.
Somehow, the general population, seems to find a degree of "consolation and solace" with the appropriate doses of soap operas, enough soccer, a few Coronas, and a two to three wives in different sectors of the country, (this last one, only applies to special cases.). In the past, the population has been able to "put up with it", however, as the middle class manages to grow, the above "pastimes and temporary Band-Aids, are losing validity.
IMO, this process is going to be repeated into eternity, until Mexico learns to change their ways... (Fat chance, for that, ha, ha, ha, ha), or for practical purposes, Mexico becomes part of the US in some form of another.....
For example NAFTA is a step in that direction, another is the immigration, and (its own growth internally), of the Hispanic population in the US, (example by the year 2000 40 % of the population in California (US) will be Hispanic, with 39 % Anglos; by 2020 Hispanics it is considered, will be the majority.
Talk about stealth methods of getting some real estate back..... he, he, he....
I assume that for other countries the same takes place, in various degrees... the Mexican case, I believe is different given the proximity, the border, and the current profile of the existing Hispanic population, in the US.
Just my opinion. And I could be wrung....
p.s. Figures for the US and Mexico.
US trade balance to date (12 mo). -$214.6 Billion
Current account: (12 mo). -165.4 Q-1
Foreign reserves to June + 60.1 Billion
Mexico trade balance (12 mo., to date) -4.5 Billion. (June)
Current account: (12 mo). -10.7 Q-1
Foreign Reserves: 30.7 Billion (June) |
